BILL ANALYSIS                                                                                                                                                                                                    Ó




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  AB 2439                     HEARING:  6/27/12
          AUTHOR:  Eng                          FISCAL:  Yes
          VERSION:  6/20/12                     TAX LEVY:  No
          CONSULTANT:  Miller & Grinnell        

                          CORPORATE TAXES: DISCLOSURE
          

          Requires the FTB to publish a list of the 1,500 largest 
          corporate taxpayers and their tax liability. 


                           Background and Existing Law  

          Existing state and federal laws generally prohibit unlawful 
          disclosure or inspection of any income tax return 
          information.   Existing state law (RTC section 19546) 
          allows a committee of either house of the Legislature to 
          examine confidential taxpayer information.  Criminal 
          sanctions, including imprisonment, apply to FTB personnel 
          convicted of unlawful disclosure or inspection of tax 
          records.   The Franchise Tax Board (FTB) must notify a 
          taxpayer if criminal charges have been filed for willful 
          unauthorized inspection or disclosure of their tax data.  
          However, FTB may publish statistical data related to 
          taxpayer information so long as nothing specific to a 
          single taxpayer is disclosed.  Notwithstanding these 
          provisions, the Legislature directed FTB to publish a list 
          of the top 500 tax delinquencies over $100,000 (AB 1418, 
          Horton, 2006 and AB 1424, Perea, 2011).  

          Existing state law provides various tax credits designed to 
          provide incentives for taxpayers that incur certain 
          expenses, such as child adoption, or to influence behavior, 
          including business practices and decisions, such as 
          research and development credits and Geographically 
          Targeted Economic Development Area credits.  The 
          Legislature typically enacts such tax incentives to 
          encourage taxpayers to do something but for the tax credit, 
          they would otherwise not do.   Except for four industries 
          (agriculture, banking & finance, savings &loan and 
          extractive) California law allows multistate taxpayers to 
          choose which apportionment formula to use when paying 
          taxes: the four factor formula based on personnel, property 




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          and double weighted sales or only on sales (single sales 
          factor).

          Existing law also requires the Department of Finance to 
          annually publish a report detailing tax expenditures, and 
          relevant costs.



          A Form 10-K is an annual report required by the U.S. 
          Securities and Exchange Commission (SEC), that gives a 
          comprehensive summary of a public company's performance.  
          Although similarly named, the annual report on Form 10-K is 
          distinct from the often glossy "annual report to 
          shareholders," which a company must send to its 
          shareholders when it holds an annual meeting to elect 
          directors (though some companies combine the annual report 
          and the 10-K into one document).  The 10-K includes 
          information such as company history, organizational 
          structure, executive compensation, equity, subsidiaries, 
          and audited financial statements, among other information.


          Companies with more than $10 million in assets and a class 
          of equity securities that is held by more than 500 owners 
          must file annual and other periodic reports, regardless of 
          whether the securities are publicly or privately traded.   
          In addition to the 10-K, which is filed annually, a company 
          is also required to file quarterly reports on Form 10-Q.  
          In the period between these filings, and in case of a 
          significant event, such as a CEO departing or bankruptcy, a 
          Form 8-K must be filed in order to provide up to date 
          information.



                                   Proposed Law  

          Assembly Bill 2439 requires the FTB to publish on its 
          website a list of the 1,500 largest corporate taxpayers 
          filing a Form 10-K with the SEC.  Notwithstanding any other 
          provision of law, including confidentiality requirements, 
          the largest taxpayers shall be measured by gross receipts 
          minus returns and allowances.  The list shall include the 
          name and tax liability of each taxpayer and whether the 
          taxpayer made an election to apportion its income using 





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          only the sales factor (single sales factor).  

          The bill requires that the determination for the list 
          should be based on an original filed timely return and uses 
          the same criteria to include a taxpayer that is part of a 
          combined report (gross receipts minus allowances).  

          The list published on or before December 1, 2013, shall 
          reflect the tax liability as of October 1, 2013 for the 
          2010 and 2011 taxable years.  Each subsequent annual list 
          shall reflect the tax liability for the taxable year that 
          closed two years before the publication of the list.  For 
          two years after the list is published, FTB shall update the 
          list to reflect any changes of a taxpayer's tax liability.  



                               State Revenue Impact
           
          As the bill was substantially amended on June 20th, the 
          revenue estimate from the FTB is pending.





                                     Comments  

          1.   Purpose of the bill  .  According to the author's office: 
          AB 2439 helps provide transparency and accountability in 
          the corporation tax system.  It asks for one simple data 
          point which is very close to data which is already publicly 
          reported in the SEC 10-K, for publicly-traded corporations. 
           Reporting tax liability consistent with federal reporting 
          will greatly advance the discussion of corporate tax reform 
          and potential changes in the law, as it has at the federal 
          level.  Combined with other publicly-available data, this 
          information will be very helpful in analyzing the impact of 
          recent major changes in the corporation tax system.   In 
          order to have an informed discussion of on-going tax reform 
          and to evaluate future proposed policies, it is important 
          to know who pays and who has benefitted from the recent tax 
          changes and what the impacts may be of changing the system 
          during this difficult budget climate.

          2.   Opposition  .  The opposition expresses concerns that 





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          this bill will result in misleading information that 
          provides no context for a taxpayer's disposition and will 
          provide no objective evaluation of the single sales factor. 
           For many multi-state corporations, their finality tax 
          liability may not be resolved for years after their return 
          is actually filed so the information in this bill may not 
          be accurate.  Furthermore, the opposition states that 
          breeching taxpayer confidentiality is punitive to the 
          individual taxpayer but will not provide further 
          information to the state to determine whether specific tax 
          policies made sense.

          3.   Trade Offs  .  AB 2439 poses a clear tradeoff in tax 
          policy: are taxpayer privacy protections more important 
          than making public information necessary to determine how 
          much certain corporations pay in tax?  While taxpayer 
          privacy is the cornerstone of a self-assessed income tax 
          system, how can the Legislature evaluate if the tax system 
          is equitable when it doesn't know who pays what and what 
          tax breaks are worth?  Financial information is highly 
          sensitive to both individuals and business - allowing 
          friends and neighbors to know your financial investments or 
          personal spending, or to disclose vital data in a tax 
          return to a competitor, is a violation of privacy.   For 
          these reasons, state law allows felony prosecution for 
          unlawful inspection and disclosure to enforce these 
          safeguards, and FTB must notify any taxpayers if criminal 
          charges are filed.  Conversely, the proponents of the 
          measure state that during this difficult budget climate, it 
          is imperative to enact the bill to ensure that state 
          policymakers have the information necessary to determine 
          the impact of the elective single sales factor on the state 
          budget.  The Committee may wish to consider whether 
          breaching the veil of taxpayer confidentially is worth the 
          tradeoff for additional information.  

          4.  Transparent tax credits  .  AB 2439 represents one method 
          to compel additional information in the hopes of helping 
          policymakers better evaluate the effects of tax policy 
          changes on economic growth and job creation.  However, the 
          strategy may be ineffective for two reasons:  first, tax 
          credits recently enacted by the Legislature have been the 
          model of transparency, and second, the information 
          generated that questions its cost-effectiveness hasn't 
          quelled proposals for more.  SB 71 (Padilla, 2010) gave the 
          California Alternative Energy and Advanced Transportation 





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          Financing Authority (CAEATFA) the authority to provide 
          sales and use tax exemptions to green energy manufacturing, 
          and is arguably the most transparent tax credit program in 
          the state.  CAEATFA updates its website at least quarterly 
          with information on taxpayers that received the sales and 
          use tax exemption, the amount of the exemption, the number 
          of jobs created, and the proposed project's environmental 
          and economic "net benefits."  However, the largest 
          exemption (over $40 million) to date went to the famously 
          bankrupt Solyndra, and CAEATFA's own data shows that each 
          job created by the program costs the state more than 
          $120,000 in foregone revenue-likely more than the job 
          itself pays.  Legislators continue to propose to expand 
          CAEATFA programs: SB 1128 (Padilla, 2012) seeks to apply 
          the SB 71 program to include advanced manufacturing, and AB 
          796 (Blumenfield, 2012) seeks to expand its loan loss 
          reserve program.  The California Film Commission, which 
          administers California's motion picture production credit, 
          issues information about that credit, which the Legislature 
          recently extended (AB 1069, Fuentes, 2011).  The Committee 
          may wish to consider if new information actually changes 
          policy.  If so, would it make more sense to make the 
          information necessary at the beginning of any new tax 
          credit, or compel mandatory performance measures and 
          sunsets for all new tax expenditures as called for by SB 
          508 (Wolk, 2011)?  

          5.   Public is public  .  The Securities and Exchange Act of 
          1934 requires companies with more than $10 million in 
          assets whose securities are held by more than 500 owners to 
          file annual and other periodic reports for the benefit of 
          its shareholders and the investing public. These reports 
          are available to the public through the SEC's EDGAR 
          database.   Shareholders and potential investors should 
          have some idea of a firm's profits and losses, and assets 
          and liabilities.  The Citizens for Tax Justice (CTJ) combed 
          through the financial reports of the nation's largest 
          companies and found that 128 of the 250 largest U.S firms 
          paid no federal corporate income tax in at least one year 
          between 1981 and 1983 (17 paid no tax in all three).  Based 
          in part on CTJ's work, Congress enacted the Tax Reform Act 
          of 1986, the largest tax policy reform in the history of 
          the nation.  

          The Legislature previously waived individual taxpayer 
          confidentiality when it directed the tax agencies to 





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          disclose the top delinquents in the hopes that scarlet 
          letters enforce compliance.  AB 2439 goes much further: 
          instead of the current reports that FTB compiles on the 
          aggregate use of each credit, the measure directs state 
          authorities to publish the names of the top 1,500 firms 
          that file a form 10-K with the SEC, their total tax 
          liability and their apportionment formula election.  

          The proponents of this bill posit that more information and 
          taxpayer names will result in more information and 
          potentially substantive policy changes that produce a 
          better return on investment from California's tax 
          expenditure.  FTB and the Department of Finance already 
          publish tax expenditure reports detailing each tax 
          preference and related information, including its costs.  
          With that information, the Legislature has added more tax 
          expenditures in recent years than it has limited or 
          repealed.  The opposition states that not only will the 
          additional information not change public policy, but the 
          information will lack context and not provide the final 
          disposition of any individual taxpayer.  The Committee may 
          wish to consider whether substantive change will result 
          disclosing previously confidential information, especially 
          given the likely workload tradeoffs for FTB and the 
          taxpayer privacy compromises necessary to obtain it. 


          6.   Other states  .  No other state permits the disclosure of 
          confidential taxpayer information.  Four states allow some 
          information but nothing as specific as this bill and 
          nothing that specifically breeches taxpayer 
          confidentiality.  The Committee may wish to consider a 
          combination of disclosure from existing state law.
             1.   Arkansas - Allows disclosure of the name of any 
               taxpayer and the amount of any tax credit, tax rebate, 
               tax discount, or commission for the collection of a 
               tax received by such taxpayer from certain listed tax 
               incentive provisions.
             2.   Massachusetts - Reports disclosing taxable income, 
               tax, and selected other information are made available 
               for inspection but the taxpayer names and locations 
               must be redacted from the reports.
             3.   West Virginia - taxpayers' usage of tax credits, by 
               ranges of amounts, are published and information about 
               compromises of certain civil taxes are published. 
             4.   Wisconsin - Requestors can obtain the amount of tax 





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               paid or payable for any taxpayer but must agree not to 
               divulge, publish, or disseminate the information so 
               obtained.



                                Assembly Actions  

          Assembly Revenue and Taxation:       5-2
          Assembly Appropriations:            10-5
          Assembly Floor:                    47-24


                         Support and Opposition  (6/21/12)

           Support  :  California Tax Reform Association (Sponsor); 
          Alliance of Californians for Community 
          Empowerment(Sponsor); Service Employees International 
          Union, Local 721 (Sponsor); American Federation of State, 
          County, and Municipal Employees; California Federation of 
          Teachers; California Labor Federation; California Nurses 
          Association; California Partnership; PICO California; 
          Service Employees International Union, California.


           Opposition  :  BIOCOM; California Chamber of Commerce; 
          California Aerospace Technology Association; California 
          Bankers Association; California Grocers Association; 
          California Healthcare Institute; California Manufacturers 
          and Technology Association; California Retailers 
          Association; California Taxpayers Association; California 
          Water Association; Capital Area Transportation Authority; 
          Council on State Taxation; Securities Industry and 
          Financial Markets Association; Silicon Valley Leadership 
          Group; TechAmerica; TechNet.
          .